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Explain How Government Budget Can Used to Bring in Price Stability in the Economy. - CBSE (Arts) Class 12 - Economics

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Question

Explain how government budget can used to bring in price stability in the economy.

Solution

Revenue receipts are classified into

1. Tax receipts:- A tax receipt is the most important source of income for the government. A tax is a compulsory payment imposed on individuals or companies by the government to meet expenditures. There are progressive and regressive taxes, value added and specific taxes, and direct and indirect taxes.

  • Direct tax is imposed on the income of a person based on the principle of ability to pay. The income tax burden is equitably distributed on different people and institutions. Thereby the tax burden falls more on the rich than on the poor. On the other hand, indirect taxes are imposed on an individual but are paid by another person either partly or wholly. Hence, the impact and incidence of taxes are on different persons. Union excise duties and customs duties are examples of indirect taxes. Here, the producer bears the impact and the incidence of tax on the consumer. Union excise duties, i.e. taxes on the production of various goods, except on alcoholic and other drugs, which are sold within the country and custom duties which are imposed by the Central Government either on imported or exported items.
  • A tax is said to be progressive when the rate of tax increases with an increase in the taxpayer’s income. Under this system, the tax liability increases not only in absolute terms, but the proportion of income tax also increases. The rich pay a higher average income tax than the poor. On the other hand, in regressive tax, the average tax rate decreases with an increase in the income of an individual. The absolute amount of tax collection increases with an increase in the income.
  • Value added tax is imposed on value added at different phases of production. On the other hand, specific tax is levied on specific units, size and weight of a good.

2. Non-tax receipts:- Receipts to the government from sources other than taxes is known as non-tax receipts. It is collected to provide administrative services to the people.

  • A fee is imposed for a specific reason. For instance, the school management imposes a fee for the admission of a student to the school.
  • When an individual fails to appear in the court, the penalty imposed by the court is called forfeiture.
  • Under the right of escheat, when a person dies without making a will or without having any legal heirs, the bank balance or the property of the person will be acquired by the government.
  • Special assessment is a payment made by the owner of the property where the value of that property increases because of development activities of the government.
  • People offer donations to the government at times of natural calamities such as flood and earthquake.

By budgetary policy, the government stabilises prices and employment to ensure growth in the economy. This enables the control of inflationary situations and helps tackle other imbalances in the business cycle.

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Solution Explain How Government Budget Can Used to Bring in Price Stability in the Economy. Concept: Objectives of Government Budget.
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